- The Globe and the Mail -
Starbucks makes no money in coffee-obsessed Italy for the simple reason Italy is a Starbucks-free zone. But another foreign coffee giant, Nestlé, has managed to crack the Italian market with its successful Nespresso brand.
Starbucks makes no money in coffee-obsessed Italy for the simple reason Italy is a Starbucks-free zone.
No Italian worth his espresso would go near one. But another foreign coffee giant, Nestlé, has managed to crack the Italian market with its phenomenally successful Nespresso brand.
How could this be?
I am in a Nespresso boutique in Piazza di San Lorenzo in Lucina, a lovely Renaissance square in central Rome. It is not a coffee bar; it is a slickly designed store that sells the Nespresso coffee capsules and the machines in which they're used. It is always crowded; I have even seen lineups out the door.
The walls are plastered with posters of George Clooney, Nespresso's pitchman. Coffee machines made by DeLonghi, Siemens and Krups are on display, ranging in price from €149 to €999 ($242 to $1,600). The shelves are stacked with elegant little boxes filled with the six varieties of coffee. A woman hauls out her credit card to pay more than €400 for a machine and a stash of capsules. So much for the economic downturn.
A “caffe specialist” bounds toward me.
“Do you want to try one of our new aromas?” he says. I choose the so-called Indian variety, “Indriya.”
He pops the lime-green capsule in the machine and presses a button. The machine pierces the capsule and pumps high-pressure hot water through it. About 10 seconds later, I have my espresso. Simple.
I expect a metallic taste, because the capsules, which look like short, fat bullets, are made of aluminum. Pleasant surprise: The quality isn't quite up to the standards of my local coffee bar, but it's better than decent.
Nestlé, of Vevey, Switzerland, is the world's biggest packaged-foods business. Its brands are known everywhere – KitKat, Purina, Perrier, Nescafé, Smarties, Cheerios, Gerber, Lean Cuisine and dozens more. Nespresso is relatively new – it was launched in 1986, almost 50 years after the instant-coffee wonder Nescafé – but has the potential to crowd out the company's big names.
Nespresso sales last year reached 2.26 billion Swiss francs ($2.4-billion Canadian), the equivalent of 2 per cent of annual revenue. Sales should reach 2.5 billion Swiss francs in 2010, the company said last month, in spite of a slowdown in the United States. A new Nespresso factory has just been opened in France, which will double output to almost 9 billion capsules a year.
Nespresso was a slow burn. The capsule system was first launched in the office market. In the late 1990s sales began to take off, in good part because the manufacturers were able to drop the prices of espresso machines to the point they fit middle-class budgets. Sales have grown by an average of 30 per cent a year since 2000, and more than doubled between 2006 and 2008.
The brand's profits are not broken out, but you could assume margins are plump. Nestlé says Nespresso in 2008 grew 20 times faster than the global coffee market. In France and Switzerland, Nespresso's coffee market share by volume is 3 per cent, but “value” share is 20 per cent, Nestlé says.
So what did Nestlé do right? Chris Bates, a brand consultant in London who works for Murmur Research & Consultancy, said the beauty of Nespresso is that it has taken the mystery and hassle out of making premium coffee – press a button in your kitchen and you're off. “It has democratized the coffee culture.”
It appears that Nestlé has created a product that, if not recession-proof, is certainly recession-resistant, for economic and psychological reasons. The capsules are not cheap – at the equivalent of about 60 cents (Canadian) a pop – but they're not outrageously expensive either and they're less than a Starbucks' coffee. “It's affordable luxury,” Mr. Bates says. “In recessions, people still need their small indulgences, like good coffee or chocolate.”
Nestlé's Nespresso experience offers other lessons. Like Apple, which tied the iPod to iTunes, it ensured recurring revenues by mating the machine to the capsules; they only work on Nespresso machines. And you can only buy the capsules through Nespresso boutiques or though its Internet site. Patience helped. Nestlé actually obtained the first capsule patents in 1976 and obviously realized the technology had potential, for it stuck with it for more than two decades before getting results. Starbucks, a brand now in retreat, did some of the heavy lifting for Nespresso by nurturing the coffee cult around the world.
Nespresso is not perfect. The packaging – the aluminum capsules, the boxes they come in – seems extravagant. While Nestlé encourages recycling, and is trying to reduce the product's environmental footprint, there is only so much it can do because the aluminum container has no substitute. Without it, Nespresso cannot guarantee the coffee's aroma and freshness.
Coffee pods are not new and not uniquely Nespresso products. Melitta, the German company made famous by its cone-shaped paper filters for drip coffee, makes single-serve coffee packages. So does Sara Lee, with the Senseo brand, and Mars, with Flavia.
But chances are you've barely heard of Nespresso's competitors. At the moment, the Nespresso brand seems unassailable. As for me, I'm going to give Nespresso a pass. Yes, Nespresso got the marketing, mechanical and taste ingredients almost right. But I live in Italy and brewing an espresso or cappuccino in your kitchen seems to miss the point. A Nespresso machine doesn't say “buon giorno,” as my barista does, or fill my nose with coffee aroma that permeates the walls of any good Italian bar.